But it now believes that unless the Government helps reduce childcare costs, it will fail to make it “economically worthwhile” for parents in low paid jobs to work at all.

The report calls for the Government to act to rein in red tape which has helped drive up the costs carried by childminders and nurseries, which have then been passed on to parents.

In particular it suggests a “modest relaxation” of the legal ratios of staff to children at peak periods to reduce the losses some operators are experiencing and enable them to take more children.

It is also calling for efforts to help parents form informal child-minding networks to avoid the cost of expensive care altogether.

Recent polling by the website Mumsnet found that for many families the cost of childcare has overtaken their mortgage as their biggest monthly outgoing.

Government research also showed that prices for nurseries childminders and playgroups have all risen far in excess of inflation in the last year.

According to the CSJ, the average cost of childcare in London is £5.06 an hour – almost two thirds of the national minimum wage - but in many cases it is far higher.

Britain has some of the highest childcare costs in the developed world despite also having some of the highest levels of subsidy.

Next year the taxpayer will spend £2.3 billion subsidizing childcare through the benefits system – not counting a range of other incentives such as childcare vouchers received by working parents.

But Christian Guy, director of the CSJ, warned: “Throwing more money at ballooning subsidies is unlikely to be the best use of public funds, what we need a sensible and thoughtful policy change.

“Helping parents to avoid the cost of childcare all together – for example, by fostering informal childcare networks, encouraging childminding circles and helping parents to work during school hours – would be hugely beneficial.

“Another challenge facing ministers is to drive down costs so that more parents are better off if they take a job.”

David Cameron has already signalled support for ideas such as forcing schools to stay open until 8pm to help working parents.

Under the new Universal Credit, parents who go out to work will still get up to 70 per cent of the cost of their childcare met by the state and keep a small proportion of the benefits they were previously receiving.

The idea is to give people an incentive to work

But the report finds that while the new system does ensure that “work pays” for people on low incomes with one child, the claim becomes “tenuous” for those with two or more children because of the cost of childcare.

It gives the example of a single parent earning the minimum wage who has already earned enough money to start paying income tax.

Even after losing most of the benefits they were previously receiving they would still be £2.17 an hour better off in work than at home.

But that figure would be halved if they had one child in nursery care, and slashed to just 2p an hour if they had two. With three nursery age children they would be losing £1.06 for every hour they worked.

If their children were already school age but receiving after-school care they woud be 17p an hour worse off working, the report calculates.

“Work is the principal route out of poverty," it concludes.

“But extortionate childcare costs are a major barrier in getting people into work and underline why this Government’s welfare reform is so essential.

“The next phase in this journey must be a more detailed review of high childcare costs.”

A DWP Spokesman said:‬‪‬‪ “Rising childcare costs are a concern for all families including benefit claimants, and that's why we set up the Childcare Commission and tasked it with finding solutions to this problem.

‬‪‬‪"Universal Credit will target £300 million in childcare support to working households, so that 80,000 more families will be able to get into work and clearly see the benefits of working."